Developers expect better market

Portland’s commercial real estate market appears to be at a crossroads. With the lease pace picking up in some markets, the prospects for new development seem brighter than in the past couple of years. Accordingly, the Business Journal asked six developers to share their impressions of the market, and to talk a bit about the projects in their pipelines.

Jordan Schnitzer

President

Harsch Investment

Properties

Overall, Portland commercial real estate is steadily improving like most of its West Coast counterparts. As often said, Portland doesn’t experience the highs and lows like other metropolitan areas.

Business is improving with companies adding a few people at a time. This results in Class A office space being leased up at a steady pace. Because there are few large Class A spaces larger than 40,000 square feet available in new Class A buildings, Park Avenue West or another project will need to start construction soon to fill the anticipated void in 2013-2014.

Class B space remains available with about 100 spaces in the range of 4,000 to 6,000 square feet. Rents are stable and have yet to increase.

Industrial absorption picked up these past six months. While rates still remain low, space is filling up and I predict higher rates this summer into fall.

Retail has shown a glimmer as major retailers are realizing that rents are great right now, and they are actively shuffling around to take advantage of low lease rates for the long term.

Our Portland portfolio of 2.5 million square feet is at 92 percent occupancy. We suffered a little when Linens ’n Things left our Cascade Plaza Shopping center near Washington Square, so we are pleased to have Nordstrom Rack opening its 45,000-square-foot store in the fall.

Although it took us 18 months to fill the proposed Zell’s jewelry store space at Pacific Center, located at the corner of Southwest Broadway and Taylor, construction is proceeding rapidly on the $3.5 million Ruth’s Chris Steak House project.

Chris Nelson

Principal

Capstone Partners LLC

After a very difficult two years in the development business, I predict the thinner crowd of surviving developers will start to come out of hiding in 2011.

With the exception of select multifamily projects and tenant-driven build-to-suits, market conditions do not exist today for new development. However, in 2011 Portland’s healthier submarkets will see nominal growth in rents and occupancy in all property types with the exception of suburban office and strip retail.

Portland’s commercial property markets didn’t experience the overbuilding other West Coast markets did, so as our economy continues to expand I think we will see a nice bounce in rents in 2012 that will create a climate for limited development on top-quality sites in 2012. This assumes we don’t have a major set back in the economy.

As to Capstone’s focus, we have two medical office projects in pre-development and are currently under construction of Cannery Square in Sherwood’s Old Town area. This is a mixed-use development that includes new public streets, a destination town square, a community and arts center, multifamily housing and commercial space.

In 2012, we plan to convert the former cannery warehouse into the community center and hope to break ground on 100 market rate apartments there.

Brad Malsin

Managing member

Beam Development

I see the Portland real estate market slightly rebounding through the end of 2011 into 2012. We have experienced stable demand for flexible office space with small upward adjustments in rates. Demand for retail space has slowed and requires increased leasing efforts targeted directly towards successful operators with some additional incentives. We do not see a strong residential purchase market until both the credit market is relaxed and the existing inventory is absorbed. We do see continued residential rental demand for close-in properties or properties serving special niches.

We expect these conditions to continue over the next few years as credit markets remain tight and consumers focus on debt reduction and income growth. Redevelopment projects will require increased leasing commitments and be subject to lower loan-to-cost ratios. As a result, we continue to seek more creative or alternative sources of financing. Investment capital is out there and will find alternative ways to fill the void left by commercial lenders.

New development projects will increasingly be build-to-suit, public-private partnerships or catering towards specific market niches. Our pipeline projects reflect this evolution. In Eugene, for example, the Broadway Commerce Center, which opens in August, provides creative work/flex space at affordable lease rates to small and entrepreneurial companies.

Another pipeline project is renovation of the Globe Hotel in Portland’s Old Town for the Oregon College of Oriental Medicine renovation, slated to open in January 2012. We are also working on Convention Plaza Commerce Center, expected mid-2012.

Steve Wells

Managing principal

Portland office

Trammell Crow Co.

In 2010, crisis management gave way gradually to cautious planning for the future. In 2011, optimism is breaking out everywhere as operating fundamentals improve, capital re-engages and values jump.

Portland office and industrial vacancies peaked in early 2010 and have now dropped to 11.5 percent and 8.9 percent respectively, according to CoStar. Build-to-suits are the only solution for the largest industrial and urban office users, because existing vacancies are too small.

We are breaking ground on a 413,700-square-foot parts facility for Subaru in Rivergate. No existing buildings met their height and loading requirements. We will soon start a 79,800-square-foot office building for the Oregon Research Institute in Eugene, and we are pursuing large preleases for 100 Multnomah, a 337,000-square-foot office building across from the convention center.

Competition remains fierce for smaller tenants, but rents have bottomed and steady absorption continues in industrial and urban office markets. Suburban office continues to see weak demand as tenants focus on urban and walkable mixed-use developments with good transit, such as our Cascade Station project where leasing has picked up dramatically.

Last year capital competed aggressively only for marquee projects in gateway markets, but investors have much more money this year and a much broader appetite.

Kirk L. Olsen

Partner, Northwest region

DP Partners/Dermody

Properties

When DP Partners opened its Portland office in 2007, we were bullish on the market. Considering everything that’s happened with the economy and real estate industry since then, our Reno, Nev.-based company remains bullish on Portland.

Various factors such as the urban growth boundary limited the region’s supply of property during the building boom, and demand has held up relatively well in the current downturn. Since Portland’s vacancy rates are substantially lower than the national averages, rents and valuations should recover faster than many other markets. Investor interest in the market is strong: Grubb & Ellis’s Investment Outlook Report for 2011 ranks Portland in the top 10 markets for office (No. 3), industrial (No. 9) and retail (No. 5).

Our recent projects in Portland include a partnership with the Portland Development Commission in the Airport Way Urban Renewal Area. Our objective was to generate employment opportunities through industrial real estate development initiatives. We delivered a 265,000-square-foot speculative project in spring 2008 and have leased 85 percent of the building to high-quality tenants. Those include LaCrosse Footwear, where hundreds of skilled workers manufacture Danner boots.

In May 2010, we completed a $12 million design-build headquarters for Morgan Distributing, a beverage distributor.

In the Northwest, I am actively pursuing other build-to-suit projects, ranking industrial land opportunities and always exploring ways to partner with other groups. As a developer, owner and operator, we’re also growing our property management business. DP now manages more than 1 million square feet of industrial properties for institutions, such as ING Clarion.